How to Get a Rental Property Loan

Is it hard to get a rental property loan? No, as long as you know what the lenders are looking for. Learn your rental property loan requirements here.

Lending Requirements for Rental Property

Number of Properties - In the past, individuals were only allowed to finance a maximum of four properties (including their own home). However, Fannie Mae increased this limit to 10 properties in 2009.

However it's too early to rejoice. If you're in the process of getting loans for rental property, you will realize that most major lenders will only grant you loans for up to 4 properties.

Credit Score - A minimum FICO credit score of 630 is required before you can get financing for rental properties. A good credit score of 745 or higher will boost your chances of getting mortgage loans at lower interest rates.

If you already own 4 properties, then you're required to have a minimum credit score of 720 before you can qualify for your fifth loan. You can obtain your credit report (and score) from any of the 3 credit bureaus: Equifax, Experian and TransUnion

Down Payment - Most lenders will require a minimum of 20% down payment for rental property investors. If you already own 4 or more properties, then you are expected to put down 30% to 50% down payment.

Debt Ratio - In simplified terms, debt ratio is the ratio of your total debt vs your total income. For example, someone has $1000 of monthly debt payments and earns $5000 per month will have a debt ratio of 25%.

For most lenders, rental property loan requirements will allow a maximum of 36 to 42% debt ratio.

FHA Rental Property Loan Requirements

If a minimum of 20% down payment sounds too much for you to handle or don't want to tie up too much cash, then a FHA insured loan is good alternative for you to consider.

In essence, a FHA loan is a mortgage loan that is being insured by the government (Federal Housing Administration to be precise). If you ever default on your property loan, the FHA will pay the lenders for any losses.

This gives mortgage lenders a peace of mind, allowing them to offer you property loans with low down payments (as low as 10% for rental properties), lower mortgage rates and lower closing costs.

As you will expect, a FHA loan comes with certain terms and restrictions:

  • FHA mortgage limits restrict the maximum amount of property loan you can borrow depending on your state and county - You can check the FHA mortgage limits here.

  • Once you have closed on your FHA loan, you must move into it within 60 days and live there as your primary residence.

  • You're only allowed to rent out the property after you have stayed in it for 12 months

  • You're only allowed to take one FHA loan per person (barring certain exceptions)

A FHA insured loan will cost you 1% of the property loan amount upfront, plus a monthly fee for 5 years.

Financing Properties